A Merchant Cash Advance is a lump sum payment to a business in exchange for an agreed upon percentage of future credit card and/or debit card profits. The way this works is Merchant Cash Advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income. This percentage is taken directly from the processor that clears and settles the credit card payment. A company’s remittances are drawn from customers’ debit- and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with credit card payment processors and take payments directly from a business owner’s card-swipe terminal.
A Merchant Cash Advance is most often used by retail businesses that do not qualify for regular bank loans. A business cash advance can be expensive compared with interest on a bank loan, ranging from 10% to 100% effective interest. Merchant cash advances are not loans – they are a sale of a portion of future credit and/or debit card sales. Therefore merchant cash advance companies claim that they are not bound by specific laws that would limit interest rates.
Despite the cost of merchant cash advances, the structure has many advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant’s sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Additionally, the ease, simplicity and speed of the application process, as well as the lower security position (i.e. behind that of the bank and landlord) associated with merchant cash advances are significant advantages.
There are generally three different repayment methods for the business:
Find out more about Merchant Cash Advance options here.
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Can I get an MCA if I cannot get a loan from a bank?
Yes, you can. The multitude of reasons that banks won’t cater to specific clients has spawned an entire industry of alternative financing options, of which MCA is a significant part. MCA lenders don’t assess creditworthiness the same way a traditional lender would. They instead consider a merchant based on payments processed within a specific period.
Will bad credit or no credit impact my chances of an MCA?
MCA lenders don’t emphasize traditional credit risk measures too much. That’s not to say they don’t look at it at all, but having no credit or even bad credit is taken together with other measures of credit risk.
How much a merchant collects in payments every month is far more significant than the merchant’s low credit score. If merchants can demonstrate a certain amount of steady cash flow every month, then the MCA lender can use that as the basis for the amount they can lend and determine a suitable duration.
Will I need to change my existing merchant account provider?
It depends on the type of integration available between the MCA lender and the merchant account provider. It’s important to remember that once the merchant receives the MCA, the repayment can start the next day; few MCA lenders collect weekly. Often, the repayment process occurs via split payment processing. That’s when the MCA lender integrates data with a merchant’s payment processor and deducts a specific portion of the payments processed.
If that integration isn’t available from the merchant account provider, the MCA lender will require you to change processors to one with which they have an existing relationship.
How much MCA can I get approved for?
That really depends on the merchant’s payment processing history and the MCA facility offered by the MCA provider. There are MCA providers that provide cash advances from $1,000 to as high as $400,000. However, how much the merchants get approved for is determined by their payment processing history and capacity to repay within a certain period.
Businesses have the option to get approved for a higher amount by using the ACH MCA product, which not only looks at cash flow based on payments processed but total cash flow received in the merchant’s bank account. This allows an MCA provider to look at all sales proceeds received by a merchant, including cash sales instead of just credit and debit card sales.
How long before I get the funds if I’m approved for a merchant cash advance?
One of the most significant advantages of MCA is the speed with which they can be processed and paid out to merchants. The application process takes minutes, and approval is usually done within hours. Funds are typically transferred in a matter of days. However, it is vital to remember that the repayment processing can start immediately.
What is the repayment period for the MCA?
MCA providers view this financing option as short-term; thus, the duration of MCA can vary from as little as one month. They seldom go past 12 months. Also, as highlighted earlier, MCA are not-term loans, so the repayment periods aren’t fixed. They can vary based on the payments by the merchant on any given day. As a result, the repayment can be slower when business is slow and picks up as sales rebound.
How is the merchant cash advance repaid?
It is often a certain percentage of each batch or the daily total of credit/debit card payments processed, also known as the holdback rate. The MCA provider will usually have a holdback rate of 10%-30%, depending on the amount advanced and how quickly they expect to be repaid.
Another way for the MCA to be repaid is to have the amount directly debited from a merchant’s bank account. This would be done on a daily basis by the MCA provider.
Is an MCA right for my business?
As small businesses start out and are growing, they can have tremendous funding needs that aren’t always readily available. Either because the company is too new to have established credit or has poor credit. Nonetheless, merchants still have alternative financing options, including merchant cash advances.
However, it is essential to use this financing option as a last resort. MCA is fraught with risks since, unlike traditional bank products, MCA isn’t a loan. So MCA providers aren’t subject to the same regulations protecting consumers from predatory lending practices. Often the factor rate of an MCA can be the equivalent of a 60% interest rate, sometimes even higher.
Merchants may also be required to change payment processors as a stipulation of the MCA so that the provider can seamlessly split process daily repayment. This is a practice that the lender would have established with existing partners and would be loathed to set up again with another payment processor.
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